Have we reached an inflation peak already? Experts predict a slowdown soon

We are coming closer to the Bank of Canada last rate meeting for 2022, and certain economists say we may see inflation slowing down in the nearest future.

Last month, an annual inflation in Canada was unchanged at 6.9%, which is well above the BoC’s 2% target level. The central bank has raised its key lending rate 6 times this year so far in attempt to restrain the inflation. The next policy rate decision is scheduled for December 7.

According to Peter Dungan, an economics professor at the University of Toronto, it is “certainly possible” that inflation has already reached its peak.

We’ve seen strong gains in the cost of food and oil at the beginning of the year, which raised the consumer price index (CPI), Dungan says. As the CPI tracks current costs compared to the previous year, he believes the inflation could slow down as food and fuel prices fall.

“In March, April and May, the inflation rate will go down sharply as then we’ll be measuring the annual change against a price level that already has those oil and wheat price hikes in it,” – Dungan explained.

“So if those oil and wheat prices don’t go up (and so far they have not), the inflation rate, which is the change in prices, will be falling.”

At the same time, Dungan says higher energy and food costs have eroded consumers’ purchasing power. It will contribute to reducing inflation, as it will decrease consumer demand.

“And it would have happened regardless of the BoC’s decision to raise the overnight rate,” – he added.

According to a University of Toronto economic forecast from November 7, the inflation will go down from 6.8% in 2022 to 4% in 2023, then to 2.2%in 2024 and to 2% in 2025.

“One of the things I am surest about is that during two, three or four years max, our inflation rate will come back to the 1-3% target range. I don’t see anything on the horizon that could stop it, except for a world disaster,” – noted Dungan.

As you know, since March the Bank has raised its key lending rate 6 times. The full influence of those decisions will take time to unfold for the Canadian economy.

According to the central bank, it usually takes about 18-24 months to see the full effects of a policy rate change. Dungan adds that each increase postpones the effects further.

“So the finishing point of all of the rate increases is moving further with every rate hike,” – he noted.

That’s why Dungan says the BoC is facing the question if it should wait for the effects to unfold before raising borrowing costs even higher.

“The central bank has been trying to attract people’s attention and make it clear that it’s not going to let the inflation go even higher in the future. And it’s possible that the Bank needs to overshoot in order to do it,” – he said.

So, with the importance of expectations, Dungan believes the BoC may keep raising rates until inflation begins to go ease.